Figure: Demand and Supply Reference: Ref 4-5 (Figure: Demand and Supply) Refer to the figure. Which of the following statements is TRUE? I. Buyers are willing to pay $20 for the 16th unit of output and it costs sellers $60 to produce that unit. II. The gains from trade are maximized at 20 units of output. III. At four units of output, there are unexploited gains from trade. IV. A free market is likely to produce less than 12 units of output.

Question

Figure: Demand and Supply  Reference: Ref 4-5 (Figure: Demand and Supply) Refer to the figure. Which of the following statements is TRUE? I. Buyers are willing to pay $20 for the 16th unit of output and it costs sellers $60 to produce that unit. II. The gains from trade are maximized at 20 units of output. III. At four units of output, there are unexploited gains from trade. IV. A free market is likely to produce less than 12 units of output.

Quizplus · Accepted Answer

Statement I is true because the buyers are willing to pay $20 for the 16th unit of output, which is shown by the demand curve, and it costs $60 for the sellers to produce that unit, which is shown by the supply curve. 
Statement II is false because the gains from trade are actually maximized at 16 units of output, where the demand and supply curves intersect. 
Statement III is true because at four units of output, the demand curve is higher than the supply curve, indicating that there are unexploited gains from trade. 
Statement IV is false because a free market is likely to produce at the equilibrium point where the demand and supply curves intersect, which is 16 units of output.